Not surprisingly, most directors remain unconvinced that the pay ratio disclosure rule enacted by the Securities and Exchange Commission is worth the paper it is printed on. They are sold, however, on the merits of another recent rule requiring businesses to recoup senior executives incentive pay when material errors result in a financial restatement.
Those were among the insights gleaned from a new survey by professional services firm BDO USA that polled 150 corporate directors of public company boards regarding financial reporting, executive compensation, and other governance issues.
Beginning with 2018 proxies, public companies will be required to disclose the ratio of median employee pay to CEO compensation. When asked if their boards had begun to take steps to comply with this new requirement, directors were split. More than 40 percent of respondents are familiar with the new requirement but have taken no action, while 39 percent are already preparing these calculations for internal planning purposes (with no plans to go public until required). Surprisingly, 10 percent of directors said they are still unfamiliar with the controversial requirement, despite substantial media coverage and outcry.
When asked about their greatest concern with the CEO-median employee pay ratio disclosure, approximately three-quarters of directors said they do not believe it is a meaningful or helpful measure for investors. Other concerns: perceived high ratios; unfair comparisons to other companies; difficulty in identifying median employee pay; and the inability to fully exclude non-U.S. employees that inflate the ratio. A majority of board members (58 percent) believe the CEO–median employee pay ratio could lead to companies outsourcing low-wage functions to third-party contractors.
Under the SEC’s proposed pay-for-performance disclosure rules most public companies will need to report the compensation for their CEO and other senior executives during the past five years compared to the company’s total shareholder return (TSR) during that same timeframe. The survey found that roughly half of board members do not consider TSR to be an appropriate measure for company performance; 52 percent said they have no plans to add it as a metric.
More than 70 percent of board members, however, are in favor of proposed rules requiring public companies to recoup executive pay if incentives based on financial statements are later found to contain material errors; 78 percent of respondents, however, said boards should be able to use their own discretion on whether to pursue claw backs.
Although some companies voluntarily disclose corporate political spending voluntarily, a majority (53 percent) of directors said the SEC needs to develop mandatory disclosure rules, potentially acting on a rulemaking petition it has ignored for years.
There was no such support for an SEC concept release that would require the disclosure of communications between the audit committee and the external auditor was far less popular an idea. An overwhelming majority (87 percent) said these disclosures would have a negative impact on audit committee/auditor relationships.
“This is consistent with the comment letters the SEC has received on this proposal, as boards are sensitive to how such disclosures may have the unintended consequence of chilling communications between their audit committees and the external auditors,” says Amy Rojik, a partner in BDO USA’s Corporate Governance Practice.